Tag: economics

Define “Change”

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I have come to the conclusion that I should not listen to national news – it just gets me agitated.

I was driving home listening to NPR and was treated to actual soundbites from the rallying speech that President Obama gave to the Democratic caucus meeting. I had head about that, but hearing these gems really showed that many people must mistake the fact that Obama is articulate by assuming that everything he says must therefore be intelligent and accurate.

The audio clips I heard had the president emphasizing that the people elected him (and the rest of Congress) to change the direction of the country and were not seeking "more of the same." What really got to me was this well phrased analogy:

"I don’t care whether you are driving an SUV or a hybrid, if you are headed toward a cliff you have to change direction."

He’s absolutely right. My reaction was that instead of changing direction when faced with an economic cliff, the president and Congress are accelerating and hoping to grow wings by the time they reach the edge. Let’s examine the "change" that he is promoting.

The president calls inaction irresponsible – it seems to me that inaction is not something that the Bush administration can ever be accused of. In other words inaction would probably be the clearest for of change. Last year the administration got a $150 Billion dollar stimulus bill and later received another $700 Billion to unfreeze the credit markets. That’s $850 Billion in spending last year of money that we don’t have and the result is that we are still in a recession with no end in sight. The change that Obama is promoting is something on the order of $800 Billion in new spending of money that we don’t have. I’m beginning to think the politicians really don’t know the difference between legal tender and monopoly money (too bad the IRS knows the difference all too well).

President Bush and his Republican Congress raised deficit spending to an art form. When Bush got a Democratic Congress there was no change in habits. Now President Obama and his Democratic Congress are trying to build an art acadamy around Bush’s art form – that’s not the change I was looking for.

I understand that the argument Obama is trying to make is that the country is sick and honestly needs surgury. That is an argument that I can accept. The problem is that we have already tried surgury by hatchet – it doesn’t work very well. Our Republican senators are trying to insist on using a scalpel for the surgery. Their profligate economic past opens them up to accusations of hypocrisy – and many of them might very well be acting in full hypocrisy. Regarless of how hypocritical they are being the fact is that surgury with a scalpel is safer and more likely to not kill the patient. This leads to another inconvenient truth. Assuming that the patient survives surgury (whether by hatchet or by scalpel) to get a liver transplant we need to recognize that the disease was not a bad liver, it was alcoholism. Just because you have had a transplant does not mean that it’s safe to go back to the bar.

Tags bailout, Bush, economics, legislation, media, money, Obama

General life Local National pictures

Federalist Nos. 30 – 36

Federalist 30

Money is, with propriety, considered as the vital principle of the body politic; as that which sustains its life and motion, and enables it to perform its most essential functions. A complete power, therefore, to procure a regular and adequate supply of it, as far as the resources of the community will permit, may be regarded as an indispensable ingredient in every constitution.

We do not seem to recognize the corollary today that excess money, like excess food, leads to gluttany and an unhealthy government.

Federalist 31

I love the direct logic in the opening here. The assumptions are laid out and unless you can dispute the assumptions it is difficult to dispute the conclusion.

IN DISQUISITIONS of every kind, there are certain primary truths, or first principles, upon which all subsequent reasonings [sic] must depend. These contain an internal evidence which, antecedent to all reflection or combination, commands the assent of the mind. . . Of this nature are the maxims in geometry, that "the whole is greater than its part; things equal to the same are equal to one another; two straight lines cannot enclose a space; and all right angles are equal to each other." Of the same nature are these other maxims in ethics and politics, that there cannot be an effect without a cause; that the means ought to be proportioned to the end; that every power ought to be commensurate with its object; that there ought to be no limitation of a power destined to effect a purpose which is itself incapable of limitation. (emphasis added)

I also think it is interesting to note that the idea of the federal government seeking handouts from the states seemed repugnant, but today we see the repugnance of states which are almost entirely financially dependent on the federal government as was warned by the opposing argument that "an indefinite power of taxation in the {federal government} might, and probably would in time, deprive the {state governments} of the means of providing for their own necessities; and would subject them entirely to the mercy of the national legislature."

Federalist 32

It is interesting to see that even where he is wrong (believing that this danger was not real), Hamilton illustrates the very dangers that we face today as the states have almost entirely melted into the background in the face of the federal government.

Federalist 33

I found this to be an insightful and succinct delineation of the difference between laws and treaties:

If a number of political societies enter into a larger political society, the laws which the latter may enact . . . must necessarily be supreme over those societies . . . It would otherwise be a mere treaty, dependent on the good faith of the parties, and not a goverment.

Unfortunately today most of our laws are apparently nothing more than treaties that are being ignored – including the Constitution as a whole (only the form – three branches including a bicameral legislature – remains).

Federalist 34

When Hamilton explains that 93% of the expenses of the British government are dedicated to paying for war, war preparation, and war debts it should open our eyes to the foolishness of our perpetual expansion of our domestic expenses as if we could add increased military expenses when the need arises.

Federalist 35

I was interested in the recognition that representatives would not be elected from different professions in proportion to how those professions were represented in society. There is an inherent degree of inequality dues to the differing demands of different professions. Hamilton argues that those who understand money and financial realities are the best able to produce good government.

Federalist 36

Hamilton makes a passing remark that makes me think twice about the merits of expanding Congress as suggested by Thirty-Thousand.org – a larger body eventually reaches a size where they are unlikely to have any wisdom beyond the general populous – the only real question is what size is that?

Tags documents, economics, federalist, government, history, taxes

culture

One Thing Is Sure

I have enjoyed a number of discussions about politics and our current economic crisis over this Thanksgiving break. During those discussions my father-in-law made the observation that those who advocate for allowing this crisis to run its course without government intervention need to consider the implications of that course and ask themselves if they are prepared for the extremes of lawlessness and social breakdown that could accompany a deep depression.

Call me a fatalist, but I am among those who does not believe that our current approach of large and poorly applied bailouts is going to save us from such a depression. It might delay it slightly but I see us falling into the same (or worse) deep depression with these bailouts as I would expect without them. The proper solution to this crisis is to identify and return to solid financial ground. We have to abandon the practices of excessive risk and inattention to the rules of sound business that we have been ignoring for so long. Paul Krigman has a few thoughts in this direction that we should consider.

Whether we we pursue our present bailout course or not, whether we experience a deep depression wihtint he next two years or not (I just invented that timeframe up off the top of my head), there is one thing that is absolutely sure – we all should ask ourselves if we are ready for the social breakdown and lawlessness that can always potentially occur. Whether we ever face such a situation or not it is always smart to be prepared for it.

Tags economics, government, New York Times, prepare

National State

“Free Market” Health Care

The call for Lawyers to join health-reform efforts was a not so subtle reminder to me about how "free" our health care market is currently. We can’t really pretend that the cost of services or the services rendered are determined by patients and providers. In fact, they are not even determined by a combination of patients, providers, and insurance interests.

Malpractice lawsuits, whether as threat or reality, skew a provider’s treatment decisions to the legal safe side, members of the Legislature’s Health Care System Reform Task Force were told Tuesday. That approach, in turn, adds to the amount of redundant testing and is a significant but so far unaddressed factor in the reform process.

The cost of malpractice-insurance premiums for providers also is rising rapidly, Rep. Gregory Bell, R-Fruit Heights, and an attorney, told fellow task force members.

We have developed a pricing and practice environment based on a staggering concoction of laws, medical knowledge, middlemen, and advertising. Patients may demand unnecessary services or medications based on what they hear from advertisements. They may also have unreasonable expectations regarding how flawless our medical system is or should be – in other words, they may feel entitled to compensation for unavoidable tragedies. Governments step in to define what "unavoidable" means by specifying standards of practice which may bear little connection to medical necessity. Insurance companies can, by choice or accident, inflate the costs by demanding standards of practice and levels of compensation that can’t possibly take into account all the factors that should define the practice of health care and the commensurate compensation for care.

Care must cost more when malpractice insurance rates rise. Prices will increase when the salaries and profits of insurance companies must also be covered in the process of receiving health care. Checks against unnecessary care will disappear when those receiving care are not sensitive to the costs of individual procedures. Medical decisions will be skewed when manufacturers provide kickbacks to doctors and advertise their wares directly to customers who have no medical background.

While we use the Brass Serpent (the Nehushtan) as the symbol for the field of medicine we might find it convenient to use the Hydra as a symbol of the cost of health care.

The Hydra - photo by Craig Stephen
Hydra – photo by Craig Stephen

Somehow we need to slay this monster but while the sword of government may have a place in the battle it is not sufficient to complete the task – by itself the sword of government makes the monster more dangerous.

Tags Deseret News, economics, free markets, government, health care, issues, laws

National

Support But Don’t Trust

I am a strong supporter of our government. I obey the laws (even little ones like speed limits and seat belt laws) and pay my taxes without complaint and without seeking any tricks to minimize those taxes. Supporting the government, however, does not mean that I trust the government when they ask for expanded powers. I oppose the efforts of courts, congress, or the President to increase their powers in any area of society. In the financial sector that lack of trust has proven to be a sound policy recently. As September turned to October I wrote six different times opposing the bailout. All over the news and in many blogs people were saying that we should hold our noses and accept that plan because it was necessary. Now I am finding it ironic that some those same people who support the government managing more of our lives are unhappy as they see the mismanagement of the "necessary" bailout funds.

It seems that Congress is the special group in the world that can convince us to let them have more of our money based on how poorly they use it. Perot Charts reports that Theresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York testified testified in support of a plan that would "modify" 401K’s. Components of the plan include the following:

- All workers would receive a $600 annual inflation-adjusted subsidy from the U.S, government but would be required to invest 5 percent of their pay into a guaranteed retirement account which would be invested in government bonds that would accrue 3 percent per year.
- The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

This is extremely frightening considering that the 5% that you would be required to "invest" (at only 3% return) on a $25,000 salary is $1250 For that you would receive a $600 subsidy. This might appear helpful to those who make very little money, but the benefits of their savings are insignificant compared to their needs at retirement and come at a very high price for everyone who just lost their tax savings that encourage them to save in a 401K, not to mention the disincentive that this would be to business who have provided tax free matching for 401K accounts which do much better than 3% returns 90% of the time. Overall savings in the country would decline under this plan.

Is it any wonder that my support of our government does not include my trust. We should all support our government no matter who is in power, but support means that we watch them instead of trusting them. It means that we hold our leaders accountable for what they do. For me, it means that every chance I get I will encourage them to give power back to the people and the states. I like that 10th amendment – too bad it gets worse treatment than the other 26.

Tags amendments, connections, Constitution, economics, government, media, money, New York Times

life

Short Term Uncertainty

I will be spending most of next week at a conference at Disney World so I don’t know how much I’ll be posting (little if any, I suspect). Besides that, I will be trying to take some concrete action to shape the group I talked about to encourage more widespread participation in civil political dialog. I’m thinking it will be called "Anything but Neutral."

Before I go silent for a few days I thought I should share the most accurate economic news I’ve read in weeks.

Tags Anything but Neutral, economics, meta

General

Real Capitalists

My reaction to Obi wan’s claim that "pro-capitalist conservatives have pushed for governmental intervention into our capital markets" was that nobody who supported the bailout has any claim to being a capitalist. I find that my position is much more clearly stated by Judy Shelton in the Wall Street Journal:

Honest capitalism requires the following:

Free-market clarity – Consumers must be able to properly judge the inherent value of goods brought to the marketplace if markets are to function properly;

Monetary integrity – Monetary-policy decisions that "stimulate" the economy by issuing too many claims to real production, or "constrict" the economy by reducing the amount of available purchasing power or capital investment, utterly confound the notion of stable money.

Financial validity – What turns the reputable practice of granting credits to deserving borrowers into a high-stakes casino game where the biggest stacks of chips are held by speculators working for the world’s largest banks and investment houses? . . . Exotic financial derivatives that gamble on the anomalies of the global economy — currency movements, interest-rate disparities, governance incongruities — mock the very concept of "investment" to generate future higher returns from production.

Regulatory responsibility – Rule of law is a core requirement for civil society; without it, anarchy reigns. Government regulation does not create wealth, but it is a necessary condition to provide the stable and predictable environment that permits buyers and sellers to carry out economic and financial transactions with confidence.

Entrepreneurial opportunity – Much of the resentment felt by citizens toward the massive investment companies who peddled bad government paper, and the craven politicians who promoted the practice, stems from the perception that capitalism is rigged toward the most powerful. When the owner of a small retail outlet or medium-sized service firm gets into financial trouble — who steps in to help? . . . Equal access to credit is sacrificed to the overwhelming appetite of big business — especially when government skews the terms in favor of its friends.

(emphasis added)

This is what I was trying to say in Financial Foundations Exposed and which makes me reject the notion that capitalists pushed for intervention in our markets. I admit that many of those pushing for that intervention claim to be capitalists, but some of them make the claim as a lie and others make the claim in ignorance. No real capitalist could back the bailout because real capitalists recognize that there is value to be had in failure.

Tags connections, economics, government, money, reactions, Wall Street Journal

National

A Budgetary Hat-Trick

Jason shared a link to Budget Hero and I had to go take a look. If the game is to be believed, all is not yet lost in the quest to get a balanced budget without abandoning all vestiges of the social safety net that we have been spinning for the last 80 years.

I managed – with a little effort – to balance the budget, increase security, achieve energy independence, and eliminate government waste at the same time so that the budget bust date was pushed back from 2033 to sometime after 2070. I don’t know how accurate the game’s assumptions are, but it really gets you thinking.

Go see if you can achieve your goals (you get to pick your own goals) as a budget hero.

Tags connections, economics, fiscal restraint, government, taxes

culture National

Financial Foundations Exposed

Post author By David
Post date October 13, 2008
4 Comments on Financial Foundations Exposed

News reports related to the fluxuations of the stock market are not surprising or inconsistent, but when I stop to consider what they say I find that they are either disturbing or based on faulty assumptions. This holds true whether we are talking about reports of falling or rising stocks and the report on today’s rally is a good example:

U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. . . the Dow Jones Industrial Average climbed more than 936 points.

The stocks and stock markets are supposed to give an indication of the value of the companies and economies they relate to. What is it about the plan by the Federal Reserve that makes any company better managed or more successful enough to warrant an 11% increase in value over one day?

The underlying assumption is that the government action is at the root of the deciding factors leading to the investment decisions of professionals and thus it is the hand controlling the puppet of economic production and has the right to interfere in the market as it sees fit. That assumption scares me because if we ever fully accept that premise we open ourselves to more overt government action in the markets. The more blatant the interference we will accept the more arbitrary those actions can safely be until we can find ourselves in an economic 1984 where the government can decide one day that it will give $700 Billion away and buy equity stakes in our financial sector and then the next day it can declare that it has no business interfering with corporate mismanagement and it can’t spare the $700 Billion anyway.

If that assumption is faulty – that government is the driving economic force and the basis for the decisions of investment professionals – then the news reports are misrepresenting the reasons for the rise and fall of stock prices so that we never begin to deal with the real causes of those economic swings, large or small. If professional investors are really deciding that stocks are worth more at the end of the day than they were at the beginning for reasons other than the government intervention then we should be told what indicators are being used to determine that the companies are worth more today than they were yesterday.

Tags economics, media

culture

Something for Nothing

As I have been thinking and reading about the credit crisis my mind has been chewing on the idea that there are two very different kinds of investing. One is the kind of investing where you put in an initial outlay of resources and follow that with efforts to improve the investment (whether that is a company, an idea, or a building) so that the final product is greater than the sum invested and thus turns a profit. Some examples are finding a company in need of cash with a good idea, a business plan, and the support of other qualified investors and giving them cash to help realize their plans and turn a profit. Another example is buying a distressed property and fixing it up. Perhaps you are purchasing a house for $150,000 in an area where most houses are going for $225,000. You put in an extra $70,000 in materials and time to get the house in prime shape and then sell it for $240,000 – realizing $20,000 profit for your efforts.

The second kind of investing is the shortcut based on the mentality of seeking something for nothing – it’s called speculating. Although it may look similar to traditional investing it is really just a serious form of gambling. An example of this would be buying into a company that is cutting corners to turn a profit and operating with a loose regard for the rules of their business. They put on a good show with richly rewarded executives and a lot of talk, but there is no substance to their ideas if you do a little digging. Another example would be "flipping" a house. You go in and buy a house with an interest-only mortgage where the owner is in a hurry to sell and then you turn around and sell the house at a $100,000 profit within weeks without putting in any work. It also applies to those who purchase a large, showy home (compared to what their income should support) with an adjustable rate mortgage on the assumption that the value of the home will rise in time to refinance the home later using the "equity" gained by sitting in the home for a year – worse is when they intend not only to refinance, but to refinance and get cash out to support a lifestyle that they cannot support on their regular income.

A financial crisis, at least for individual cases, may result from either approach to investing – but it is much more likely (and I believe it is generally more damaging) when the crisis results from speculating. I am convinced that every time we experience a bubble in the economy – whether it’s a tech bubble, a housing bubble, or any thing else – the bubble is a result of speculation, even though there is legitimate investing taking place as well. In our current credit crunch we will not be able completely sort out those who were burned by speculating and those who were legitimately investing (the same is true anytime a bubble bursts) so we must either rescue some or all of those who were speculating, or else we will have to accept in advance that many people who did nothing wrong will be paying the price for the fallout from the rampant speculation that caused the crisis.

Tags bailout, economics, money